Larry Williams: Market Structure

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Larry Williams' Three-Bar System of Highs and Lows: A Definition of Market Structure

Larry Williams developed a method of market structure analysis based on identifying local extrema using a sequence of three consecutive bars. This approach helps traders pinpoint significant turning points on the price chart.

Definition of Local Extrema:

• Local High:
  Consists of three bars where the middle bar has the highest high, while the lows of the bars on either side are lower than the low of the middle bar.
  
• Local Low:
  Consists of three bars where the middle bar has the lowest low, while the highs of the bars on either side are higher than the high of the middle bar.
  

This structure helps identify meaningful reversal points on the price chart.

Constructing the Zigzag Line:
Once the local highs and lows are determined, they are connected with lines to create a zigzag pattern.
This zigzag reflects the major price swings, filtering out minor fluctuations and market noise.

Medium-Term Market Structure:
By analyzing the sequence of local extrema, it is possible to determine the medium-term market trend:

• Upward Structure: A sequence of higher highs and higher lows.
  
• Downward Structure: A sequence of lower highs and lower lows.
  
• Sideways Structure (Flat): Lack of a clear trend, where highs and lows remain approximately at the same level.

This method allows traders and analysts to better understand the current market phase and make informed trading decisions.

Built-in Indicator Feature:
The indicator includes a built-in functionality to display Intermediate Term Highs and Lows, which are defined by filtering short-term highs and lows as described in Larry Williams' methodology. This feature is enabled by default, ensuring traders can immediately visualize key levels for support, resistance, and trend assessment.

Quote from Larry Williams' Work on Intermediate Term Highs and Lows:
"Now, the most interesting part! Look, if we can identify a short-term high by defining it as a day with lower highs (excluding inside days) on both sides, we can take a giant leap forward and define an intermediate term high as any short-term high with lower short-term highs on both sides. But that’s not all, because we can take it even further and say that any intermediate term high with lower intermediate term highs on both sides—you see where I’m going—forms a long-term high.

For many years, I made a very good living simply by identifying these points as buy and sell signals. These points are the only valid support and resistance levels I’ve ever found. They are crucial, and the breach of these price levels provides important information about trend development and changes. Therefore, I use them for placing stop loss protection and entry methods into the market."
— Larry Williams

This insightful quote highlights the practical importance of identifying market highs and lows at different timeframes and underscores their role in effective trading strategies.